Sandisk: MKM Sees A Possible Q3 Beat, But Storm Clouds Ahead

By Teresa Rivas

Another earnings preview for next week: SanDisk (SNDK) will report after the market close on Oct. 16, and MKM Partners analyst Ada Menaker today reiterated her Neutral rating on the stock, although she did raise her fair value estimate by $2 to $55.

Despite her neutral stance on the stock, Menaker writes that she wouldn’t be surprised to see a beat: The stock is already up more than 40% this year on supply uncertainty and benign NAND pricing. However, her outyear estimates are below consensus, as she thinks that the current pricing environment isn’t sustainable in the long term. “Pricing may well remain benign through 4Q13 on limited capacity growth and uncertainty around Hynix (even though thus far the DRAM shortages have not impacted NAND), but with demand growth slowing, despite the increasing popularity of SSDs, industry supply/demand will likely be more balanced in 2014, leading to a resumption of price declines.”

By contrast, she notes that consensus figures seem to factor in favorable pricing, cost reductions and high big growth in the future—a goldilocks scenario she sees as unlikely. She says she prefers Micron Technology (MU), given its completed acquisition of Elpida, although she also rates that stock Neutral.

More of her thoughts on SanDisk:

With our 2014 EPS estimate still below consensus, we are particularly concerned that some investors are overly optimistic on overall bit demand, though we agree that limited capacity additions and Hynix uncertainty will drive benign pricing through the end of 2013.

The expansion of Fab 5 is unlikely to contribute to supply growth until 2015 – growth in NAND supply will likely be limited to that which can be achieved through shrinks and, in MU’s case, potential conversions from DRAM – supply will thus remain constrained, but will likely balance slowing demand growth.

SNDK has been moving away from the lower-margin card business, and several acquisitions will help it move into enterprise storage (the higher end of the SSD market) – we expect upbeat management commentary around progress in this area.

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